Hawaii is one of the few states with leasehold property. Most properties in Hawaii are sold as “fee simple” meaning you own both the physical property and the land. Fee simple ownership is the most comprehensive type of ownership. “Leasehold” property means that you do not own the land. The leasehold owner enters into a lease agreement with a fee simple owner with the right to use the unit, per the lease agreement. The leasehold owner pays a monthly “lease rent” to the fee simple owner.
property is generally less expensive than fee simple property and can look very
attractive to buyers. There are extra costs associated with leasehold property
and that is
“lease rent”. Leasehold property means you have the right
to use the land only for a certain amount of time years (1-99 years). During
that time you pay lease rent to the owner of the land.
think of this similar to a 6 month or 1 year rental extended for x amount of
years. It can be viewed as a secured rental unit for however long your lease
is. During the course of the lease the lease rent will be
“renegotiated”. This usually happens every 10 years (depending on how
the lease is written). This renegotiation can be thought of in the same way as your monthly rent going
up periodically due to inflation, costs, etc. The way the lease rent is
renegotiated is written into the leasehold documents. Lease rent is calculated
off of the value of the land at the time of the renegotiation. Land in Hawaii
generally appreciates over time so the lease rent tends to always go up.
property is not recommended for most buyers as the lease rent could go up
substantially (double or triple) several times over the course of ownership. If
buyers do not plan for these increases in advance they may have more monthly
expenses than they planned for.
end of the lease term there are several things that could happen depending on
what the fee owner wants to do. The best situation would be if the fee owner
offers the fee to the leasehold owner. The leasehold owner can now purchase the
fee and own a fee simple property. They could re-negotiate and extend the lease
with the leasehold owner for x number of years. The last option is the fee
owner could take back the entire property and you would be left with nothing.
The last is the worst-case scenario. This happens sometimes when one owner owns
the fee for the land and decides to turn the entire building into something
else such as turning an apartment building into a hotel.
property may be right for the right buyer. Retired buyers that are looking for less
cost than a fee simple property and are okay with the length of the lease might
be a perfect fit. Investors that can get a good return on the property, taking
into account the lease rent, renegotiation, and length of the lease might be
another great fit.
have any specific questions about leasehold property please feel free to
contact me at (808) 351-8394 or Josephc@BetterHawaii.com